When we talk about entrepreneurship, venture capital, startups, investments, the association with Silicon Valley is almost inevitable. Why is that? Many scholars have tried to explain it, venture capitalists have provided their views, and entrepreneurs come every year to the Bay Area in search of the magic pill. Silicon Valley in my opinion is a conversion of many variables in one place that worked successfully – funding, risk appetite, curiosity, relationships, failure as a lesson learned, brand recognition, to name a few. Cities have tried to replicate it. Countries have tried to replicate it. Let’s be clear, it cannot be replicated. However, there are some fundamentals that if worked correctly, there is a good chance to create a thriving VC ecosystem. When sourcing investments, Elementz Ventures look for those fundamentals, and if they are not present, it is part of the investment thesis to address them.
A thriving VC ecosystem needs a stable economy – market uncertainties and inefficiencies can certainly create opportunities. In many ways, companies are created to solve these problems, however without a stable economy, they may not survive in the long run. Its product or service can be replicated, it may not find the required resources to move to the next level, and often downturn economic cycles force companies to go sideways, or bankrupt. If they survive, recover can take years. I have operated in Emerging Markets for many years, although I have seen outstanding returns, they were not consistent. Economic crisis can wipeout returns, or have your capital tied up for many years. In this case, there is only two options for Entrepreneurs and Asset Managers: time the market correctly, or connect the company to more liquid markets.
Conducive policies are key for the VC ecosystem to perform. It can be as simple as easy rules and regulations to establish a company, to reduce red tape, to more complicated issues such as labor laws and stock listing. Policies should also evolve with the market. For example, Governments may provide general funding to establish the industry, or specific policies to address gaps in some sectors (e.g cleantech), or investments in early stages (first loss). Nevertheless, the ultimate goal is to have the private sector driving the decisions and policy makers to design and implement policies that address market needs.
The next two pillars come hand in hand. You need a group of companies to invest and the required capital to fund each investment stage. It may sound simple, but it takes time to develop. Some companies are created in university research centers, others come from solving a problem or changing the status quo. These companies require operational, financial, and strategic support. Capital may be scarce at the beginning. In many countries, the Government had a major role jumpstarting the industry. In the US, the Military helped create Silicon Valley. The same could be said for Israel, where most entrepreneurs have a military background and created companies to address military needs. In Brazil and Mexico, the government, through its development agencies, fostered the industry by providing capital to both companies and asset managers. As the VC ecosystem evolves, other sources of capital start to participate. They are angel networks, incubators/accelerator programs, family offices, other institutional investors, corporate ventures. Companies benefit from mentors and seasoned professionals who have experienced startup “pain” before. In developed ecosystems, they all work together, allowing most of the companies to access the required resources to fund their growth.
Finally, a successful story. Once you have a successful story, make sure to market it. This will create a virtuous cycle where other entrepreneurs will try to follow your footsteps. Some will try to replicate, whereas others will take part of the supply chain. Ideas will turn into new companies. Innovation will happen, and that will attract all stakeholders. At the end of the day, you want investors to fund venture capital funds, and VCs to fund companies.
Can companies survive without a solid VC ecosystem? Sure, they can. Would their chances of success be much higher if they have access to capital and other resources all the way? Absolutely. Let’s consider a company’s J-curve below:
In developed VC Ecosystems (e.g. USA, UK, Israel, Singapore), if entrepreneurs survive the Valley of Death, funding is available to support all the following stages, from market penetration to growth, to an IPO. In less developed VC ecosystems (e.g. Latin America, MENA), if entrepreneurs survive the Valley of Death, and receive seed investment, they may still fail to reach full potential. They may still face a second Valley of Death. This is because of a lack of resources for follow-on investments (Series B onward) or delayed financing, which can further deteriorate the company’s finances if there is an economic downturn. Therefore, a solid VC ecosystem is not the solution for all startup problems, but they can certainly play a role in their success.